Most startups, after attaining product market fit, need funds to scale their operations and increase market traction.  In general, a startup goes through Series A fundraise only when the startup switches gears from product development to business development. This is the first serious infusion of private capital for a startup. Most of the decisions taken by the startup at this stage is about scaling operations, team, and ensuring sales growth, all of which requires significant funds, expertise, and long term planning. 

At this stage, the business built by the startup has been validated and is ready to scale. However, since the startup has to deal with a completely new set of challenges, i.e. scaling operations, increase sales, improve unit economics, build a strong team, etc., it needs both funds and expertise to help them navigate this unchartered territory smoothly. For first time founders, these can be uncertain times. At this stage, investors involved in Series A often play a crucial role in the growth of a startup.

Importance of Series A

Though fundraising at every stage is important and each fundraise is meant for different purposes i.e. product development, market expansion, scaling operations, increase team size, etc., Series A fundraising is one of the most critical stages of funding for any startup.  Series A fundraising is generally done by a startup when they have already made meaningful progress i.e., attain product market fit, secure early stage customers, witness clear market traction, have proof of scalability and unit economics, etc. and are now looking forward to expanding their business. Generally, at this stage, the startup has mostly done its share of experiments to understand their customers, have built a good product, and are now looking to standardise operations to scale the business effectively. This stage becomes crucial because:

1. Mindful Founder Equity Dilution: Series A fundraising is the first round where the startup raises significant funds at high equity dilution. Miscalculation in this stage can prove very costly for the startup. High dilution will leave the startup team with no equity to dilute at future stages, whereas too low dilution might blow up startups’ valuation heavily for future rounds which can be hard to achieve, and the startup might have to raise funds at lower valuation in the next round.
2. Creation of ESOP Pool:  To attract talent and build a strong team, it’s important to provide stock options to the new recruits. Generally, as the team is poised to scale, it is essential for a startup to separate a chunk of equity as ESOP Pool which helps retain talent. During Series A fundraise, investors often insist on creating a good ESOP pool, that makes up for around 15% in equity.
3. Investor’s Support for Follow-on Rounds: The investors who participate in this round will play a crucial role in securing funds for follow on rounds. If the investors can’t fund the startup in the next rounds or don’t have a good network to support in the next stages, it might be a huge problem.
4. Access to Domain Experts: Generally, at Series A stage, a startup is well poised to expand its operations and increase market share, both of which require experienced professionals. Most of the Venture Capital firms are Industry focused and are connected with experts in their specific domain, which can be of huge help to the startup. 
5. Tap into Investors’ Network: At this stage, it becomes important to build useful connections, establish partnerships with prominent players in the value chain, get favorable deals, etc. so that the startup can get advantage over others. A venture capital firm can help the startup with initial introductions and provide guidance while negotiating details, which can create multiple synergies for the business.

The list isn’t exhaustive, but the key driving point is, Series A fundraising is one of the most crucial steps for a startup. It will have a huge influence on the startup’s future milestones. At this stage, startups start to scale different business functions and increase market traction, both of which need funds, expertise, and long term commitment from investors. 

For a startup, Series A round is the first sign of a startup’s transition from exploration to business development, which means significant changes in the startup operations, pace of execution, startup goals, and many other essential aspects. All these changes require huge spending, which means even one major mistake can seriously affect the startup’s long term viability. It’s essential for a startup to evaluate this round critically and choose the ones that offer a fair deal with a willingness to commit towards the startup’s goals on a long term basis.